October 18, 2011
Buffalo, New York
The slides in this presentation have been adapted from a presentation given by the following panelists at the Oklahoma Corporation Commission Oil and Gas Institute in Tulsa, Oklahoma on September 23, 2011:
Dana L. Murphy, Chair, Oklahoma Corporation Commission
John R. Reeves, Attorney at Law
Terry Stowers, Attorney at Law, National Association of Royalty Owners
Loyd Tinsley, Senior Land Advisor, Devon Energy Production Corp.
Mark Fisher, Southern Region Land Manager, Continental Resources, Inc.Signing of HB 1909 on April 13, 20111,320’
1,320’
1,320’
1,320’
2640’ Lateral165’
165’
330’
330’
4950’ Lateral5,000’
Lateral Well
10,000’
Lateral Well
12,000’ Vertical - $3,000,000
12,000’ Vertical - $3,000,000
5,000’ Horizontal - $1,000,000
5,000’ Horizontal - $1,000,000
5,000’ Horizontal - $1,500,000
Completion - $4,000,000
Completion - $7,500,000
__________
$8,000,000
__________
$13,000,000165’
330’
10,000’ Lateral
18
19165’
330’
3,500’ Lateral
18
19165’
330’
18
19
3,500’ Lateral
Advances in horizontal drilling techniques for wells drilled and completed in shale reservoirs (i.e., Woodford) advanced beyond Oklahoma’s historical statutory spacing scheme, in particular with laterals exceeding 5,280 feet in length.

Attempts by various producers during the 2009 and 2010 Legislative Sessions to create larger, 1,280-acre drilling and spacing units were met with great resistance by mineral owner representatives and numerous producers.

After the 2010 Legislative Session, Oklahoma Corporation Commissioner Dana Murphy was asked to assemble a working group of the stakeholders to work on proposed legislation to construct an equitable solution to fully develop shale reservoirs.
The stakeholders assembled consisted of representatives for the: (a) operators actively drilling horizontal shale wells; (b) operators currently drilling horizontal shale wells in other states; (c) mineral owners; (d) Oklahoma Independent Petroleum Association; and (e) Mid-Continent Oil and Gas Association.

Over the course of almost nine months beginning in August 2010, the working group invested hundreds of hours in discussing, drafting and re-drafting proposed legislation to address the issues raised by the stakeholders during the meetings.

HB 1909 passed the House on March 17, 2011, by an 87-0 vote, and the Senate by a 45-0 vote on April 6, 2011. It was signed by the Governor on April 13, 2011.
HB 1909 codified at 52 O.S. § 87.6 et seq.

The Act provides two new tools for development of shale reservoirs:
›
Tool 1 — Allows drilling of horizontal wells in shale reservoirs across existing unit boundaries, with the costs, production and proceeds allocated to each of the affected units
›
Tool 2 — Creates a new type of unit for horizontal shale development (a hybrid which incorporates portions of existing legal authority for drilling and spacing units and enhanced recovery units)
Tool 1 allows drilling of horizontal wells in shale reservoirs across existing unit boundaries (i.e., across two or more existing 640-acre units).
›
The drilling & production costs, the oil and gas production and the sales proceeds will be allocated to each of the affected units in a manner to protect the correlative rights of parties in each unit.

The default allocation is a proration between the units based upon the feet of perforations in each of the units.

Based upon reasonable testimony, the OCC can adjust the allocations to protect the correlative rights of the parties in each unit, if necessary.
›
The portion of the completed horizontal lateral in each unit will be treated as a separate well for that unit.
Tool 1 (cont.)
›
The application for a multiunit horizontal well must include a map showing: (1) all existing wells in each of the affected units; (2) the currently proposed multiunit horizontal well(s); and (3) all other wells that are anticipated to be necessary for the full and efficient development of the shale reservoir.
›
The application for a multiunit horizontal well must include the proposed allocation factors for the well.
›
The application and notice of hearing must be served on all owners who have a right to share in proceeds from the affected units.
›
Payment of proceeds from a multiunit horizontal well shall be subject to the provision of the Production Revenue Standards Act (PRSA).Fault
18
19
5,000’
5,000’
4,000’
3,000’
5,000’ / 9,000’
55.56%
4,000’ / 9,000’
44.44%
5,000’ / 8,000’
62.50%
3,000’ / 8,000’
37.50%
#1
#2Multiunit Horizontal Well
4,500 feet
4,000 feet
8,500 feet Total Completion Interval
Section 6
Section 7
Shale Reservoir
100,000 mcf produced from Example 6‐1H
52,941 mcf from Example 6‐1H(7) – 100,000 mcf X 4,500/8,500 = 52,941 mcf
47,059 mcf from Example 6‐1H(6) – 100,000 mcf X 4,000/8,500 = 47,059 mcf
The Act treats the lateral in each section as a separate well.
Example 6-1H(6) Well
Example 6-1H(7) WellUnit 1
Allocation Factor = 60%
Sales Allocated to Unit 1
$1,000 X 60% = $600.00
Royalty Share (PRSA 570.2(9)) = 18.75%
‐‐‐‐‐‐‐‐‐‐‐‐
Royalty Proceeds = $112.50
(PRSA 579.2(8))
Total Sales for Cross‐unit Horizontal Well = $1,000
PRSA Concept - All RO share proportionately in all sales.
Easy application if operator sells 100% of gas for ALL WI
Unit 2
Allocation Factor = 40%
Sales Allocated to Unit 2
$1,000 X 40% = $400.00
Royalty Share (PRSA 570.2(9)) = 15.00%
‐‐‐‐‐‐‐‐‐‐‐‐
Royalty Proceeds = $ 60.00
(PRSA 579.2(8))
Royalty Proceeds Unit 1 = $112.50
Royalty Proceeds Unit 2 = $ 60.00
‐‐‐‐‐‐‐‐‐‐‐‐
Total Royalty Proceeds = $172.50
But, what if Operator only owns Unit 1 and WI #2 owns
Unit 2 only, with the Operator selling 100% of the gas
for itself and not for WI#2. In order to carryout the PRSA
Concept, we have to make some adjustments.
“Wellbore royalty interest ” shall mean, for each separate multi‐unit horizontal well, the sum of resulting products of each affected unit’s royalty share for that unit, as defined by the PRSA, multiplied by that unit’s allocation factor for production and proceeds.
Unit 1 Unit 2
Royalty Share 18.75% 15.00%
Allocation Factor X 60% X 40%
‐‐‐‐‐‐‐‐‐‐‐ ��‐‐‐‐‐‐‐‐‐
Wellbore Royalty .1125 + .06 = .1725
Interest
“Wellbore royalty proceeds” shall mean the proceeds or other revenue derived from or attributable to any production of oil and gas from the multi‐unit horizontal well multiplied by the wellbore royalty interest.
Total Sales $1,000.00
Wellbore Royalty Interest X .1725
‐‐‐‐‐‐‐‐‐‐‐‐‐‐
Wellbore Royalty Proceeds $172.50
“Unit’s royalty contribution factor” shall mean the royalty share for an affected unit, as defined by PRSA, multiplied by that unit’s allocation factor, then divided by the total wellbore royalty interest.
Unit 1 Unit 2
Royalty Share 18.75% 15.00%
Allocation Factor X 60% X 40%
‐‐‐‐‐‐‐‐‐‐‐ ‐‐‐‐‐‐‐‐‐‐
.1125 .06
Wellbore Royalty ÷.1725 ÷.1725
Interest ‐‐‐‐‐‐‐‐‐‐‐ ‐‐‐‐‐‐‐‐‐
Unit’s royalty .65217391 .34782609
contribution factor
A(5) ‐ The wellbore royalty proceeds for a multi‐unit horizontal well shall be allocated to each affected unit by multiplying the unit’s royalty contribution factor by the wellbore royalty proceeds, with the resulting product being the royalty proceeds for that unit.
Royalty Proceeds for: Unit 1 Unit 2
Contr. Factor .65217391 .34782609
Royalty proceeds X $172.50 X $172.50
‐‐‐‐‐‐‐‐‐‐‐ ‐‐‐‐‐‐‐‐‐‐
$112.50 $60.00
The Royalty Proceeds for each Unit is then multiplied by a Royalty
Owner’s proportionate royalty decimal in that Unit. The Royalty
Owner’s decimal does NOT change for each Multiunit Horizontal
Well drilled in the Unit, only the allocation of production to each
Unit changes from well to well.Mississippi
Woodford
Hunton
Fault
Mississippi
Woodford
Hunton
18
19Mississippi
Woodford
Hunton
18
19Mississippi
Woodford
Hunton
18
19
Point of Entry
Lateral
TerminusPoint of Entry
Lateral
Terminus
18
19
Mississippi
Hunton
WoodfordPoint of Entry
Lateral
Terminus
First Perf
Last Perf
Mississippi
Woodford
Hunton
18
19
Tool 2 creates a new hybrid-type of unit for horizontal shale development (a hybrid between a §87.1-drilling and spacing unit and a §287.1 enhanced recovery unit, which has been used for decades for secondary recovery methods (often referred to as a “unitization”).
›
The new hybrid unit would be two governmental sections (i.e., 1,280 acres).
›
The unit could be expanded up to four governmental sections if necessary and under certain conditions.
›
The application must include a Plan of Development for the full and efficient development of shale reservoir.
›
Costs and proceeds shall be shared just as in a standard §87.1 drilling and spacing unit (all owners share proportionately based upon their ownership), unless adjustments are necessary because of existing development.
Tool 2 (cont.)
›
The new larger unit can only be created with the express written consent of at least 63% of working interest owners and 63% of the royalty owners (based on number of acres owned, not number of parties). This is similar to the existing requirement for enhanced recovery units.
›
The application and notice of hearing must be served on all owners who have a right to share in proceeds from the affected units.
›
Payment of proceeds from a horizontal well unitization shall be subject to the provision of the Production Revenue Standards Act (PRSA).
Other provisions of the bill:
›
Modifies § 87.1 of Title 52 to clarify the ability to utilize irregularly shaped units (e.g., 640- acre unit that is 1/2 mile wide by 2 miles long).
›
Modifies § 287.1 of Title 52 to clarify that enhanced recovery units are not available for primary production (confirming a recent ruling by the OCC).
Factors to be considered:
›
Geology
›
Technology
›
Cost
›
Potential untapped reserves
›
Reduced footprint

Click tabs to swap between content that is broken into logical sections.

October 18, 2011
Buffalo, New York
The slides in this presentation have been adapted from a presentation given by the following panelists at the Oklahoma Corporation Commission Oil and Gas Institute in Tulsa, Oklahoma on September 23, 2011:
Dana L. Murphy, Chair, Oklahoma Corporation Commission
John R. Reeves, Attorney at Law
Terry Stowers, Attorney at Law, National Association of Royalty Owners
Loyd Tinsley, Senior Land Advisor, Devon Energy Production Corp.
Mark Fisher, Southern Region Land Manager, Continental Resources, Inc.Signing of HB 1909 on April 13, 20111,320’
1,320’
1,320’
1,320’
2640’ Lateral165’
165’
330’
330’
4950’ Lateral5,000’
Lateral Well
10,000’
Lateral Well
12,000’ Vertical - $3,000,000
12,000’ Vertical - $3,000,000
5,000’ Horizontal - $1,000,000
5,000’ Horizontal - $1,000,000
5,000’ Horizontal - $1,500,000
Completion - $4,000,000
Completion - $7,500,000
__________
$8,000,000
__________
$13,000,000165’
330’
10,000’ Lateral
18
19165’
330’
3,500’ Lateral
18
19165’
330’
18
19
3,500’ Lateral
Advances in horizontal drilling techniques for wells drilled and completed in shale reservoirs (i.e., Woodford) advanced beyond Oklahoma’s historical statutory spacing scheme, in particular with laterals exceeding 5,280 feet in length.

Attempts by various producers during the 2009 and 2010 Legislative Sessions to create larger, 1,280-acre drilling and spacing units were met with great resistance by mineral owner representatives and numerous producers.

After the 2010 Legislative Session, Oklahoma Corporation Commissioner Dana Murphy was asked to assemble a working group of the stakeholders to work on proposed legislation to construct an equitable solution to fully develop shale reservoirs.
The stakeholders assembled consisted of representatives for the: (a) operators actively drilling horizontal shale wells; (b) operators currently drilling horizontal shale wells in other states; (c) mineral owners; (d) Oklahoma Independent Petroleum Association; and (e) Mid-Continent Oil and Gas Association.

Over the course of almost nine months beginning in August 2010, the working group invested hundreds of hours in discussing, drafting and re-drafting proposed legislation to address the issues raised by the stakeholders during the meetings.

HB 1909 passed the House on March 17, 2011, by an 87-0 vote, and the Senate by a 45-0 vote on April 6, 2011. It was signed by the Governor on April 13, 2011.
HB 1909 codified at 52 O.S. § 87.6 et seq.

The Act provides two new tools for development of shale reservoirs:
›
Tool 1 — Allows drilling of horizontal wells in shale reservoirs across existing unit boundaries, with the costs, production and proceeds allocated to each of the affected units
›
Tool 2 — Creates a new type of unit for horizontal shale development (a hybrid which incorporates portions of existing legal authority for drilling and spacing units and enhanced recovery units)
Tool 1 allows drilling of horizontal wells in shale reservoirs across existing unit boundaries (i.e., across two or more existing 640-acre units).
›
The drilling & production costs, the oil and gas production and the sales proceeds will be allocated to each of the affected units in a manner to protect the correlative rights of parties in each unit.

The default allocation is a proration between the units based upon the feet of perforations in each of the units.

Based upon reasonable testimony, the OCC can adjust the allocations to protect the correlative rights of the parties in each unit, if necessary.
›
The portion of the completed horizontal lateral in each unit will be treated as a separate well for that unit.
Tool 1 (cont.)
›
The application for a multiunit horizontal well must include a map showing: (1) all existing wells in each of the affected units; (2) the currently proposed multiunit horizontal well(s); and (3) all other wells that are anticipated to be necessary for the full and efficient development of the shale reservoir.
›
The application for a multiunit horizontal well must include the proposed allocation factors for the well.
›
The application and notice of hearing must be served on all owners who have a right to share in proceeds from the affected units.
›
Payment of proceeds from a multiunit horizontal well shall be subject to the provision of the Production Revenue Standards Act (PRSA).Fault
18
19
5,000’
5,000’
4,000’
3,000’
5,000’ / 9,000’
55.56%
4,000’ / 9,000’
44.44%
5,000’ / 8,000’
62.50%
3,000’ / 8,000’
37.50%
#1
#2Multiunit Horizontal Well
4,500 feet
4,000 feet
8,500 feet Total Completion Interval
Section 6
Section 7
Shale Reservoir
100,000 mcf produced from Example 6‐1H
52,941 mcf from Example 6‐1H(7) – 100,000 mcf X 4,500/8,500 = 52,941 mcf
47,059 mcf from Example 6‐1H(6) – 100,000 mcf X 4,000/8,500 = 47,059 mcf
The Act treats the lateral in each section as a separate well.
Example 6-1H(6) Well
Example 6-1H(7) WellUnit 1
Allocation Factor = 60%
Sales Allocated to Unit 1
$1,000 X 60% = $600.00
Royalty Share (PRSA 570.2(9)) = 18.75%
‐‐‐‐‐‐‐‐‐‐‐‐
Royalty Proceeds = $112.50
(PRSA 579.2(8))
Total Sales for Cross‐unit Horizontal Well = $1,000
PRSA Concept - All RO share proportionately in all sales.
Easy application if operator sells 100% of gas for ALL WI
Unit 2
Allocation Factor = 40%
Sales Allocated to Unit 2
$1,000 X 40% = $400.00
Royalty Share (PRSA 570.2(9)) = 15.00%
‐‐‐‐‐‐‐‐‐‐‐‐
Royalty Proceeds = $ 60.00
(PRSA 579.2(8))
Royalty Proceeds Unit 1 = $112.50
Royalty Proceeds Unit 2 = $ 60.00
‐‐‐‐‐‐‐‐‐‐‐‐
Total Royalty Proceeds = $172.50
But, what if Operator only owns Unit 1 and WI #2 owns
Unit 2 only, with the Operator selling 100% of the gas
for itself and not for WI#2. In order to carryout the PRSA
Concept, we have to make some adjustments.
“Wellbore royalty interest ” shall mean, for each separate multi‐unit horizontal well, the sum of resulting products of each affected unit’s royalty share for that unit, as defined by the PRSA, multiplied by that unit’s allocation factor for production and proceeds.
Unit 1 Unit 2
Royalty Share 18.75% 15.00%
Allocation Factor X 60% X 40%
‐‐‐‐‐‐‐‐‐‐‐ ��‐‐‐‐‐‐‐‐‐
Wellbore Royalty .1125 + .06 = .1725
Interest
“Wellbore royalty proceeds” shall mean the proceeds or other revenue derived from or attributable to any production of oil and gas from the multi‐unit horizontal well multiplied by the wellbore royalty interest.
Total Sales $1,000.00
Wellbore Royalty Interest X .1725
‐‐‐‐‐‐‐‐‐‐‐‐‐‐
Wellbore Royalty Proceeds $172.50
“Unit’s royalty contribution factor” shall mean the royalty share for an affected unit, as defined by PRSA, multiplied by that unit’s allocation factor, then divided by the total wellbore royalty interest.
Unit 1 Unit 2
Royalty Share 18.75% 15.00%
Allocation Factor X 60% X 40%
‐‐‐‐‐‐‐‐‐‐‐ ‐‐‐‐‐‐‐‐‐‐
.1125 .06
Wellbore Royalty ÷.1725 ÷.1725
Interest ‐‐‐‐‐‐‐‐‐‐‐ ‐‐‐‐‐‐‐‐‐
Unit’s royalty .65217391 .34782609
contribution factor
A(5) ‐ The wellbore royalty proceeds for a multi‐unit horizontal well shall be allocated to each affected unit by multiplying the unit’s royalty contribution factor by the wellbore royalty proceeds, with the resulting product being the royalty proceeds for that unit.
Royalty Proceeds for: Unit 1 Unit 2
Contr. Factor .65217391 .34782609
Royalty proceeds X $172.50 X $172.50
‐‐‐‐‐‐‐‐‐‐‐ ‐‐‐‐‐‐‐‐‐‐
$112.50 $60.00
The Royalty Proceeds for each Unit is then multiplied by a Royalty
Owner’s proportionate royalty decimal in that Unit. The Royalty
Owner’s decimal does NOT change for each Multiunit Horizontal
Well drilled in the Unit, only the allocation of production to each
Unit changes from well to well.Mississippi
Woodford
Hunton
Fault
Mississippi
Woodford
Hunton
18
19Mississippi
Woodford
Hunton
18
19Mississippi
Woodford
Hunton
18
19
Point of Entry
Lateral
TerminusPoint of Entry
Lateral
Terminus
18
19
Mississippi
Hunton
WoodfordPoint of Entry
Lateral
Terminus
First Perf
Last Perf
Mississippi
Woodford
Hunton
18
19
Tool 2 creates a new hybrid-type of unit for horizontal shale development (a hybrid between a §87.1-drilling and spacing unit and a §287.1 enhanced recovery unit, which has been used for decades for secondary recovery methods (often referred to as a “unitization”).
›
The new hybrid unit would be two governmental sections (i.e., 1,280 acres).
›
The unit could be expanded up to four governmental sections if necessary and under certain conditions.
›
The application must include a Plan of Development for the full and efficient development of shale reservoir.
›
Costs and proceeds shall be shared just as in a standard §87.1 drilling and spacing unit (all owners share proportionately based upon their ownership), unless adjustments are necessary because of existing development.
Tool 2 (cont.)
›
The new larger unit can only be created with the express written consent of at least 63% of working interest owners and 63% of the royalty owners (based on number of acres owned, not number of parties). This is similar to the existing requirement for enhanced recovery units.
›
The application and notice of hearing must be served on all owners who have a right to share in proceeds from the affected units.
›
Payment of proceeds from a horizontal well unitization shall be subject to the provision of the Production Revenue Standards Act (PRSA).
Other provisions of the bill:
›
Modifies § 87.1 of Title 52 to clarify the ability to utilize irregularly shaped units (e.g., 640- acre unit that is 1/2 mile wide by 2 miles long).
›
Modifies § 287.1 of Title 52 to clarify that enhanced recovery units are not available for primary production (confirming a recent ruling by the OCC).
Factors to be considered:
›
Geology
›
Technology
›
Cost
›
Potential untapped reserves
›
Reduced footprint